Costs of production

Warm-up

What are three things you learned from yesterday’s lesson about supply.

Essential question

Essential question:You are running a business. How do you account for the costs of production and labor so that you know how much you are spending on production?

Labor & OutputScenario

You own a widget factory. It takes 1 worker 1 hour to produce 6 widgets. It takes 2 workers 1 hour to produce 11 widgets. It takes 5 workers 1 hour to produce 22 widgets. You make a profit of 6 dollars of each widget produced. Each worker makes 20 dollars an hour. In which scenario above do you make the most profit per hour?

Total Profit

1 worker, 10 widgets per hour (10 widgets x 6 dollars

profit each) equals 36 dollars profit per hour minus $20 wage of worker is equal to $16 profit per hour

2 workers, 11 widgets per hour $24 profit per hour

5 workers, 22 widgets per hour $32 profit per hour

Marginal Product of Labor

The change in output from hiring one more worker

Marginal Product of Labor = Change in output ÷ per unit change in labor

For example 1 worker from zero workers 6-0 (change in output) / (1-

0) change in labor 6/1 which is equal to 6 The marginal product of

labor for 1 worker from zero is 6

Calculations

Calculate the Marginal Product of Labor from: 1 worker to 2 workers 2 workers to 5 workers

Remember marginal product of labor = Change in output/Change in per unit of labor

Calculations

1 worker Change in output (6-0)/ Change in labor (1-0)

6/1 is equal to 6 Marginal product of labor is 6

2 workers Change in output (11-6)/Change in labor (2-1)

5/1 is equal to 5 Marginal product of labor is 5

5 workers from 2 workers Change in output (22-11)/ Change in labor 5-2)

11/3 is equal to 3 and 2/3 Marginal product of labor is 3 and 2/3

Diminishing Marginal Returns

A level of production in which the marginal product of labor decreases as the number of workers increase

Here 200 workers (agents) produce 300 widgets while 400 workers only produce 200 widgets (units of return/output)

This is an example of diminishing marginal return

Video on marginal profit & diminishing marginal return

http://www.youtube.com/watch?v=MtuCPRlTl38

Production costs

Fixed Costs A cost that does not change

Rent Property Taxes Mortgage Payment Cable Bill

Variable costs Costs that rise or fall depending on how much is produced

Electricity Bill Retail items such as food or electronics. For instance, 1 box of spaghetti

might cost me $2 whereas 3 boxes of spaghetti would cost me $6 Labor is a variable cost. If you are not selling as many widgets, you may

decide to lay someone off to reduce your cost of labor.

Total Cost Variable costs plus Fixed Costs

Part time SalesmanAn employee with guaranteed contract at

$30,000 for 3 yearsInternet BillElectricity BillCost of goods such as oranges, avocados

Identify whether the following are variable costs or fixed costs

Marginal Cost

Marginal cost is the total cost that arises to produce one more unit

Marginal cost = Change in total cost ÷ Change in output

Example• I’m producing widgets once again. My fixed cost is $20.

Additionally, 1 widget has a variable cost of 2 dollars, 2 widgets have a variable cost of $3 and 3 widgets have a variable cost of $3.50. Each widget is selling for $10

• What is the total cost to produce one widget?• What is the marginal cost to produce 1 widget, 2 widgets,

3 widgets?• How many widgets must I produce to make a profit?

Marginal Cost Answers

Total Cost is $22 for one widget ($23 for 2 widgets, $23.50 for 3 widgets and so on)

Marginal Cost for one widget is $2 Marginal cost for two widgets is $1 Marginal cost for three widgets is $.50

I must produce 3 widgets to make a profit

Project

You are opening a new restaurant and you need to calculate your costs of production. You will be in groups of 4 and each group will have 2 iPads (2 students per iPad) to research actual costs. You may want to research what the costs are to operate a restaurant. The costs will depend on how large or small your restaurant is and what kind of restaurant you are operating. For instance, the costs of operating a McDonalds will probably be cheap, while the cost of operating a fancy restaurant such

What will your fixed costs be? Research the cost of each individual fixed cost

What will your variable costs be? Research the cost of each variable cost

Calculate your total costs of production, including labor